By Jon Swartz
Cisco Systems Inc. shares dipped 7% in after-hours trading Wednesday after a disappointing forecast that could be related to weakness in China and tech-spending concerns that the networking giant has so far managed to avoid.
The San Jose, Calif.-based company /zigman2/quotes/209509471/composite CSCO +4.88% rang up fiscal fourth-quarter earnings of $2.2 billion, or 51 cents a share, on revenue of $13.43 billion, up 6% year-over-year. After adjusting for stock-based compensation and other effects, Cisco reported $3.6 billion in non-GAAP net income, or 83 cents a share. Analysts surveyed by FactSet had estimated net income of 81 cents a share on revenue of $13.4 billion. For the year, Cisco earned $2.61 a share on sales of $51.7 billion.
Though the fourth-quarter report reaffirmed analysts’ sentiments that the company has successfully transformed from a hardware outfit to one that is focused on hybrid-cloud computing and software subscription plans, its guidance was muted. Cisco forecast revenue with flat to 2% growth year-over-year, and a non-GAAP EPS range of 80 cents to 82 cents a share. Analysts polled by FactSet expected growth of about 2.5% and EPS of 83 cents.
In response to an analyst’s question about soft guidance during a conference call, Cisco CEO Chuck Robbins noted “challenges” in service-provider orders and weakness in China, which is locked in a tariff showdown with the U.S.
“We did see in July some slight early indications of some macro shifts that we didn’t see in the prior quarter,” Robbins said in the call after results were announced.
“We didn’t close (the quarter) as strong as we would have liked,” Robbins continued. “The macro issues manifested themselves... I don’t judge where we are based on the (Q1) guidance.”
Cisco has largely avoided entanglement in the trade dispute between the U.S. and China by adjusting prices and moving contract manufacturing from China, which accounts for less than 3% of its revenue. Still, Cisco has been “boxed out” of the Chinese market by some nationalist sentiment, impacting sales, Cisco Chief Financial Officer Kelly Kramer told MarketWatch in a phone interview.
Cisco shares are up 17% this year, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.48% has gained 13% in that time. On a day the stock market slumped over recession fears, shares of Cisco had already been punished, falling 4% in the regular session.
Robbins earlier characterized Q4 as “a strong end to a great year.” Infrastructure platforms led the quarter’s revenue, up 6% to $7.9 billion, aided by stable demand for network switches, including the popular Catalyst 9000. Applications-division revenue improved 11% to $1.5 billion, and the security segment climbed 14% to $714 million.
Still, some analysts are concerned about Cisco’s ability to maintain its dominance of enterprise networks with growing competition from Hewlett Packard Enterprise Co. /zigman2/quotes/201998588/composite HPE +1.25% , Arista Networks Inc. /zigman2/quotes/206966450/composite ANET +4.73% , and VMware Inc. /zigman2/quotes/209864107/composite VMW +9.71% .
Cisco “will undoubtedly continue its overwhelming dominance there, but that dominance isn’t what it once was,” Glenn O’Donnell, a research director at Forrester Research who follows Cisco, told MarketWatch in a phone interview after the results were announced. “It is facing some serious competition for the first time in many years.”